What Was HOPE for Homeowners?
The term HOPE for Homeowners refers to a federal aid program designed to help homeowners in financial distress as a result of the collapse of the subprime mortgage market in 2008. Backed by the Federal Housing Administration (FHA), the HOPE for Homeowners Act was one of the steps the federal government took to help stabilize the housing market and protect qualified homeowners from loan default and foreclosure.
The program was active for roughly three years and ended in September 2011.
- HOPE for Homeowners was a federal aid program designed to help mortgagors in financial distress as a result of the collapse of the subprime mortgage market.
- The program was backed by the Federal Housing Administration (FHA).
- Financially distressed homeowners were allowed to refinance their mortgages into affordable 30-year fixed-rate loans.
- The program ran between October 2008 and September 2011.
Understanding HOPE for Homeowners
After the tech bubble burst, the American economy began to experience growth. Interest rates were at historic lows and real estate prices were dropping. This led to an increase in demand for homes and mortgages, causing a boom in the housing market. Lenders began relaxing their lending requirements, allowing consumers who otherwise wouldn't qualify for mortgages to take out high-risk loans.
But when the market crashed, it led to one of the biggest recessions in history. A rise in interest rates and real estate values caused many homeowners to default on their monthly mortgage payments. That's when the federal government stepped in to help.
The HOPE for Homeowners program was part of the Emergency Economic Stabilization Act of 2008, which became law as the subprime mortgage crisis peaked in October of that year. Part of the law required the government to provide federal loan guarantees and credit enhancements for homeowners that found themselves in financial distress. The program aimed to allow homeowners to refinance into affordable, 30-year fixed-rate mortgage loans. The FHA promised to guarantee new mortgage loans up to $300 billion as part of the program. It ran between Oct. 1, 2008, and Sept. 30, 2011.
In order to qualify for the program, homeowners had to meet the following requirements:
- Properties were required to be owner-occupied and the owner's primary residence; second homes and vacation properties didn't count.
- The original mortgage had to be dated on or before Jan. 1, 2008.
- They could not have defaulted on the original loan intentionally.
- They could not be invested in multiple home loans.
- All information on the original mortgage was true and verified, including income sources and job details.
- They could not have been convicted of fraud.
Participation in the program was voluntary, so homeowners needed to apply in order to take part. Similarly, not all lenders took part in HOPE for Homeowners but those that did were FHA-approved. Under the program, participating lenders were required to reduce the principal balance of the outstanding mortgage to 90% of the property's new value.
As mentioned above, program participants received a 30-year fixed-rate mortgage. In some cases, that 30-year loan was eligible for an extension. Extending to 40 years was helpful in cases where the homeowner had to carry a particularly large amount of debt, which was an issue for many homeowners. The 40-year option, therefore, allowed for a lower monthly mortgage payment.
Homeowners also had to agree to an equity-sharing program. In this case, equity was the difference between the amount of the original loan and the actual value of the home. If the home was sold or refinanced after the homeowner accepted assistance from the HOPE for Homeowners program, any equity gained had to be shared with the Federal Housing Administration (FHA). How much the government received was contingent on how long the homeowner waited to sell or refinance.
If a sale occurred in the first year of participation in HOPE for Homeowners, the government received 100% of the equity. Any equity earned after year two was divided on a sliding scale. So, if a homeowner sold their property in the second year after refinancing, they were allowed to keep 10% of the equity. While the FHA got 90%, in the third year, the split was 20% for the homeowners and 80% for the FHA, and so on. After the fifth year, the homeowner and the FHA split the equity 50/50.